Crowdfunding Websites Clamour for Clearer Securities Regulation

A new breed of internet-based financiers want to end regulatory uncertainty they say is preventing them from getting money to the small and medium-sized businesses that need it.

LONDON, Dec 7 A new breed of internet-based
financiers are calling for action to end regulatory uncertainty
they say is preventing them from getting money to the small and
medium-sized businesses that need it.

The so-called crowdfunding sector raises cash from members
of the public to fund lending and investment. Regulators,
however, have proved resistant to pleas for adjustments to rules
that are tailored to more traditional markets.

"Operators of these platforms find it difficult to launch
and flourish because existing EU and UK regulation does not fit
the new models," operators within the sector said in an open
letter to EU and UK policymakers on Friday.

The plea coincides with a summit to discuss proposals for
regulating a market that has developed in reaction to reduced
bank lending to small and medium-sized enterprises because of
tougher capital rules and greater regulatory scrutiny.

A host of alternative financing models have cropped up
online, many allowing individuals to lend to, or invest in,
companies with sums from as little as 10 pounds ($16).
Massolution, a research and advisory firm specialising in the
sector, says that 1.2 billion euros ($1.6 billion) was raised
globally from crowdfunding last year.

Though some crowdfunding websites have tried to fit their
operations within the existing regulatory framework, most remain
largely outside it.

Part of the problem in drawing up appropriate regulation is
the wide range of activities involved. Some offer debt, some
equity, while others seek donations for charity or funding for
creative projects in return for some non-financial reward.

With little or no expected returns from the latter, the main
regulatory focus would be on equity crowdfunding and
peer-to-peer lending.

As well as making sure that individuals are aware of the
inherent risk involved with putting money in start-ups, the
industry wants to avoid the risk of scams by ensuring that
platforms vet businesses adequately.

LOST IN THE CROWD

Britain's Financial Services Authority (FSA) warned in
August that inexperienced investors should be aware of the risks
in crowdfunding websites. A few days later United States
securities regulators put crowdfunding at the top of their
annual investment scams list.

Views differ about how to tackle these risks without
stifling an increasingly important source of funding, and the
matter is complicated by the varying rules already in place in
different countries across Europe.

Measures taken by Seedrs, the only crowdfunding website to
have received FSA approval, include requiring investors to pass
a test to show that they understand the risks.

"It is hard to come up with a whole securities regulation;
sometimes it does have to be a bit incremental and adaptive,"
Seedrs founder Jeff Lynn said. "There is no question at all this
is going to be a space that will continue to move."

Some would like the operation of such platforms to be a
distinct regulated activity, but others argue for smaller steps,
such as a cap on the sums that people can invest or lend.

The British government, keen to improve the flow of finance
to small businesses to boost the sluggish economy, has set up a
working group to look at all aspects of policy on such sites.

The FSA said that it considers authorisation of crowdfunding
schemes case by case. The European Commission, meanwhile, is
considered as so far having had a largely observational role.

Though the introduction of a separate regulated activity
could still be some way off, the co-founder of peer-to-peer site
Zopa, Simon Deane-Johns, believes that increased engagement with
governments and regulators shows that things are moving in the
right direction.

"Over the next year or two it should become progressively
easier to set up a platform," he said, "possibly through a
combination of the FSA understanding more readily where things
fit within the current regime and balancing that with some
self-regulation."

It wasn't all bad luck for the capital markets this week: Hedge funds had a decent first quarter despite a slowdown in jobs numbers, BlackRock might be heading into new territory as hedge fund managers take a hard look at their counterparties, and the head of the IMF didn't pull any punches when assessing today's global economy. At least we can admire the nice weather and some of the best quotes of the week.